Investing in Syrian crude, the wild card

The political risks of investing in Syria’s oil industry are high, but so are the financial rewards for those who take the plunge

Syria|~||~||~|Syria’s oil production is dropping dramatically and it is engaged in a high-tension stand off with the United States. Both of which make its oil fields a tempting, but risky, prize for non-US energy firms.

Currently, Syria produces 420,000 barrels of oil per day (bpd), some 200,000 bpd go for export, and the rest is used for domestic consumption. Without foreign investment the output will plummet to some 200,000 bpd by the end of the decade, a painful decline from the glorious heydays of the early 1990s when it cranked out 500,000 bpd, according to oil analysts. The US government’s Energy Information Authority predicts that Syria’s petroleum will run out completely in ten years.

As long as Damascus eyeballs Washington in regional politics, its need for economic independence, which would be threatened if it became a net importer, is greater than ever, as is its need for foreign firms to help it get crude out of the ground. As things stand, so long as Syria is out of favour with the US, any overseas firms helping Syria to upgrade its oilfields can extract a risk premium. Damascus—a high-level political player in the Middle East but low-level oil producer—never seems to be out of Washington’s sights for long.

Nearly two decades ago, Marathon Oil, Chevron, Royal Dutch Shell, and BP were exploring Syria for gas and oil. Today, as the conflict continues in neighbouring Iraq and Lebanon, and the United Nations investigates if Syrian government officials plotted the assassination of a Lebanese prime minister, only Total and Shell have persisted and still have a presence in Damascus. Last year, the US firms were told by their government to get out of Syria.

In early May of 2006, US president George Bush reinstated economic sanctions that he had first imposed on Syria two years earlier.

Accordingly, in June, Exxon-Mobile withdrew from its joint venture Alemco, selling its 49% share to Syrian businessmen because of the sanctions and for political reasons.

Several American oil companies active in the energy business felt principled or pressured into withdrawing from their Syrian operations in 2004.

As US firms are not allowed into Syria’s market the field is open to other energy players.

And they have not been slow off the mark, despite the risk associated with getting on the wrong side of Uncle Sam and the potential fallout from any possible change of government.

Syria’s new minister of economic development has been seeking Russian, Chinese, and French investments. He has been busy.

In Moscow, Russia’s Foreign Minister, Sergei Lavrov, announced that Russian and Syrian companies are weighing the pros and cons of working together on several oil and gas projects. At a briefing Lavrov said, “Russian companies are interested in cooperating with Syrian partners in the oil and gas sector.”

At another briefing, after negotiations with his ministerial counterpart in Syria, Walid Mualem, Lavrov reported that, “Blueprints for the implementation of such joint projects include attracting third parties.”

Meanwhile, Syria has caught the attention of China and India, the two most populous countries in the world that are both enjoying an economic growth rate that has made them intense rivals and major buyers in the world’s oil market for fuel. When the two competitors made a joint bid for part of a Syrian oilfield, the energy world took note.

Marc Benton, the head of Oil and Gas at Citigroup in Hong Kong, said: “Such linkups are likely to be conducted on a case-by-case basis and where they make commercial sense.”Citigroup in Hong Kong advised state-run China National Petroleum Corp and India’s Oil & Natural Gas Corp on their joint bid on Al Furat oil field in December. The Chinese and Indians also agreed to co-operate in securing the energy supplies so necessary for future economic growth.

CNPC and ONGC paid US $575 million for an 18.75% stake in Al Furat that had been held by Petro-Canada (PCZ). One company, Gulfsands Petroleum, which is listed on London’s AIM stock exchange, recently struck oil, boosting its share prices to a new high after the oil and gas explorer said an independent study of the Tigris structure on Block 26 in Syria “significantly” increases the company’s overall petroleum reserves.

A study by Ryder Scott put Gulfsands’ probable, possible and prospective reserves at 722 million barrels of oil equivalent (boe) if the structure is primarily a natural gas field. The AIM-listed group, operator and owner of 50% of the Block, said the independent petroleum engineering firm put reserves at 563 million boe if the structure is primarily a petroleum accumulation.

Gulfsands started drilling a well on the Tigris structure in August. The group found that three of the six wells previously drilled within the Block encountered potentially commercial hydrocarbon accumulations.

The largest of these, the Tigris structure, is found beneath the Souedieh Field, the largest oil field in Syria with estimated reserves of some 2 billion barrels, with around 1.3 billion barrels produced so far.

“The report further demonstrates the lower risk associated with finding large oil and gas reserves in Block 26 and increases the total Block potential significantly.”

And the influx of foreign investment has also boosted gas production. The Syrian oil ministry claims that because of recent discoveries by foreign companies, gas production in Syria will double in the next three years.

Furthermore, the government says that reports about the imminent depletion of oil are speculation that have no scientific basis. They said studies conducted by both the Syrian Oil Company and international companies in agreement and co-ordination with the Oil Ministry did not indicate a specific date for the depletion of oil.

And whatever the amount of crude in the reserves is, overseas companies are more than willing to look for it, no matter what is happening to any of Syria’s neighbours.

At today’s oil price, the lure of black gold outweighs fears of getting on the wrong side of Uncle Sam in the shifting sands of Middle East politics.||**||